Street Talk | COVID-19 Series: Episode 1
Featuring Franklin Street's:
Andrew Wright, CEO and Managing Partner
Darron Kattan, Managing Director of Multifamily Investment Sales
Andrew Wright: 0:04
All right. Welcome. This is our first edition of street talk, something we're trying out building off of our webinar from last week. We had a number of questions and wanted to drill in on specific topics. Here with me is is my long time partner and friend, Darren Catan, who specializes in investment sales specifically in the Central Florida apartment market. But we're gonna try toe to cover a bunch more than that. So welcome, Darren. Thanks for joining me. Thanks. Good morning. Well, jumping right into it. Maybe we could start with a little bit of recap on where we were, say, mid February in the investment market.
Darron Kattan: 0:45
Well, first and foremost, we weren't sitting in our home office is like we are now, you know, broadcasting on zoom calls. We would go down the hall, talk to each other about the world that you know, the world is different. So, you know, as far as you know, the investment sales market, we'll see they very long. Call it 10 year run, which is one of the longest runs of commercial real estate now used to positive you're history. Um, after the financial crash, we obviously found a very low bottom. And, you know, the economy and the commercial real estate space had moved up significantly since then. Uh, at the same time, interest rates step. Been at our hovering at all time lows for for a large part of the period after finished fast prices. So because of that cap rates had come down. On top of that, equity is plentiful and you'll departments have been lowered over the last few years, and that's pushing more money into the space and more and more pressure on Catholics to go down. So before the, uh, you know, Kobe, 19 had really taken it back. We were seeing all time low cap rates across the board of the best sales transactions throughout, Really the country on high growth markets like Florida on, you know, some belt states were, you know, we're seeing it amplify. Multi family is a favorite product take at all times. That's always seen it. Uh, you push it too low cooperates, but awful sectors. All product types had seen lolo cap rates, you know, regularly, every transaction was basically setting new new high water marks for values and new little watermarks for cabinets.
Andrew Wright: 2:24
It was interesting. Definitely in our careers, cap rates were at the lowest they've ever been, and it makes me think a little about 2006 5 2006 We were talking about something similar at historically low cap rates. Highest prices in history that we had seen the collapse comes and eight years later were not only back to where we were, but actually even lower higher, depending upon if you talk about cooperates or for prices. A lot of you also talked a lot about the buyer. Demand buyers up there can talk a little bit about about that again. Pre Cove it, too. Let's stick around February kind of buyer demand composition, where you saw a lot of activity where their liquidity was coming from.
Darron Kattan: 3:07
Sure, you know, and it's it's interesting how similar real estate cycles and by our profiles are after, you know, and during cycles truly at the, uh, we'll take you back to 2008. The bottom with cycle. What you saw is at, you know, non syndicated money. Families with wealth, high net worth individuals, True equity were the most active buyers, you know, they have a longstanding generational wealth. People and at the bottom of the market. They tend to be the most active fires because there is a little leverage, no leverage, or they go their own baking relationships of leverage. Point is very easy for them when the marketplace during crash, which not sure if we're in a crash yet or not here but during a crash leverage becomes a problem, and therefore cash becomes Kate. So at the bottom of the cycle, you'll always see the high net worth family and generational that money be the most active. As things ramp up, the professional real estates indicators will kind of step in and kind of take things to the next level. Everything will get back on its feet in terms of lending. Everything will get back on its feet, turns operations. And we saw that around 2011 and 12 maybe 13 when the market really started to pick up steam again after the financial crash. Then, as you as you start to to protect you get towards the top of a cycle, you know, the bell curve that we've all seen our cycle. You see the newest indicators, the more risky syndicators, the people that are Morphy driven, Um, take center stage and become more active on. We had seen that most recent, you know, 12 to 18 months where the amount of buyers that we were seeing our transactions, uh was certainly low ringing in terms of the number of offers we were getting. And the quality of those offers was being was lower, too. And I'm not talking about the price, too. Terms. I'm talking about the buyer profile of the quality, his in numerous indicators that didn't have as much track record or didn't have track record and in your market or your product type that we're tryingto make a dollar and try put deals together. And that's indicate he's so that's where we were. You know, if this is another real estate crash of sorts, you will, I think, see that regression to the mean again between going back towards the high net, where if cash is came, generation taper family off this money being the most active coming out of this event that we're in right now, a lot of that is dependent on the lending community of the London community stays very active. The real estates indicators of the world can stay very active because they're all 11 trip himself. I'm a tone that when I guess, as best we could say,
Andrew Wright: 5:45
Well, lending is exactly where I was going to go next. Obviously, on the investment side, debt markets are so correlated with investment pricing returns, etcetera. In 2006 we saw that right with the condiment loan CMBS loans doing 80% alone's 10 year Iose suspect at credit checks that we saw a little bit of a difference in this cycle. But not sure, exactly. You know how how much is going to be impacted here in the coming future? Uh, but speak toe lending, lending environment last year, too,
Darron Kattan: 6:22
you know? Yeah, it certainly was a little more tempered, I think is the best word to put it as LTV's did not get out of control on first mortgage debt like they had before. Interest only was creeping up there and getting you no longer lumber. But you know, at the same time that the worrisome part of it was that the otherwise we're moving up so rapidly. Yeah, pro former, but but even regular analyzed because we had seen such great rent growth as if a comedy being so strong that values were very I. So even though LTV's were kept in check, if the values escalated at at rapid levels, which they were the actual debt hurt per foot per unit. Per you know, whatever metric you're looking at, I was actually getting reaching, you know, high water marks historically, in that respect to So while it does appear that it was more temper it there is in troublesome parts of it. If again, if we hit a cyclical part of, ah, downward trend values because their their leverage points on a perfect per unit basis, will will be out of whack with current values, if if the an ally of sound.
Andrew Wright: 7:30
So I wanna summarize kind of where we've been record high values y buyer pool, lots of liquidity, discipline, lending with good loan, the values that were really buoyed by tremendous rent growth on population growth. I think that's a fair synopsis. I
Darron Kattan: 7:47
mean, good times by ah, a perfect storm in a good direction. You know which, of course, you know, if you've been in the real estate world, you know that everything is kind of hit on all cylinders put your rain are on because something's about to wacky out of the out of the clear blue sky, which obviously this effective.
Andrew Wright: 8:06
It's amazing how that happens. I'm over my career. We talked a lot about you know, the proverbial black swan events, and I think the essence of that black swan event the definition of is that you never see it coming. It's always something that's out there that's unforeseen. That changes things I don't think we had ever anticipated. Such a drastic demand fall off revenue fall off that we're seeing now and are still somewhat in free fall. But I guess that's really the next. Questions who were riding high were at the top of the market. Lots of liquidity, lots of buyers dollars continuing toe, trade up, trade up, trade up, talk about maybe the immediate impact over the last 30 to 45 days and and just start by talking about deals and underwriting will get into buyer profile seller profiles.
Darron Kattan: 8:59
Yeah, I mean, as far as you know, the marketplace, I take the debt stop right now from a transactional standpoint, and it was it was a heavy freight train going really fast. So, uh, you know, not an easy thing to hit the brakes and stop it in its tracks, so to speak. Any deal that that had not first let me do it wasn't under contract, Likely not hunted completely. Anything that was under contract but not rate locked on was dependent upon debt. It was likely canceled or, you know, extended anything of the rate lock was able to kind of work its way towards the closing table. So we've seen the last, you know, 30 day that we're still seeing closings. A little bit of it, I'll be some did fall out, but, you know, almost, I would say almost a normal ish type of transaction pipeline, but right behind that, it's a dead stop. Transactions the interesting part. And I don't have that many anecdotal examples of this. But there were many deals out there that had a significant amount of hard money that did not have rate lock on those is going to be the problem. Deals that are probably still working themselves three things with buyers, you know, buying themselves time and extensions while they figure things out. Because right now that the tap markets are all over the board. Um, you know, the requirement by most lenders to have an interest reserved for a year is just crushing ir ours out there on DSO buyers didn't know rates. You know, the 10 years, obviously at all time lows. Ah, spreads have gone up to make up for that. Interest rates are going up, so the lending environment is not really favorable. You know, lenders and appraisers and buyers don't really understand where we're under, right? And why, cause what kind of rents are you actually gonna collect over the short medium term here? So there's so many problems out there in terms of question marks in the underwriting that the lending environment is gonna naturally get really conservative at this stage on data last probably at least 3 to 6 months. In my opinion,
Andrew Wright: 11:01
that's been a common theme with everyone you talk to is just wears the bottom right until the economy turns back on and we can really take inventory of the damage that's been done in the effects. It's hard to hard under a and you know, if we have unemployment hit 25% for something extended period of time, while I think apartment specifically have been a little bit insulated. They're not gonna be able to withstand unemployment with those levels for that long a period of time. So certainly will be interested to see how long this goes. But it does make, feels hard to underwrite, maybe talk a little about the psychology. You know, I mentioned this on the call on our webinar. Seems that buyers expectations have changed overnight, but not so much for sellers. Maybe talk a little bit. I think that's what was driving the bed. Ask is guessing in part the the reality of what can you underwrite? But I also think expectations there's a pretty wide divide today between buyer and seller expectations.
Darron Kattan: 11:59
Yeah, I mean, I think that one of the factors that goes into that is that, you know, the people that have been doing this for a long time that have been through at least the last cycle have been sort of waiting for the next crash. To be honest with you on looking forward to another big buying opportunity, which, of course, in hindsight, anytime you look back at a real estate crash, I should about everything I saw, um, you know, still hurt. Do it to pull off the transactions that have the cash to be able to understand the, you know, there be down and that you're at the bottom. So I think that there's so many people that are in this business that happened through the last crash, at least if not the one before that that there's been that kind of licking their lips, waiting for that opportunity to come up. So I think a lot of sense immediately and flipped their switchers. That right, this is it. I'm a buyer, and we've done a lot of inward traffic calls, say, rightly that plenty of kaffir ready to go. You know, I personally think that it's way too early. The sellers haven't really felt pain yet. Even if they anticipate pain, they actually you know, really, nobody's probably missed a mortgage payment yet, so it's a long time for missing your first mortgage payment until deals become an opportunity. You know there will be special circumstances. I think more on the equities Ivan on deal side, where an equity partner will need to plug a hole in their portfolio somewhere and need some cash or make a decision that they need cash and they will liquidate of equity position at that discount. I think that will be the first shoe that drops in first opportunity. Uh, from a transactional standpoint, I think you're the 6 to 9 months away from anything, even smelling like a real opportunity. Because right right now, to be honest, most people didn't need to sell their only selling to make profit so they can know something. Whether this form, the interesting part, will be the deals that have transacted and or refinanced at high leverage points in the last call, 12 to 24 months. Those would be the first ones to have problems. But a lot of those were well, you know, they're capitalized going in as far as their cap acts and everything, so they should be able to weather the storm if they're properly. Uh, we'll see those, you know, Like I said, a lot of the buyer profile had had lowered in terms of its quality. Those people tend to not be great operators to so that's what we're focused on. His deals that have closed last 12 24 months,
Andrew Wright: 14:19
so on the seller side thinking about a little bit where distress may come from because I think in the short term you would probably agree that prices haven't fallen dramatically in the multifamily sector. Will give other spots on the other product pipes. And I feel differently about some of something other product types. But multi family definitely has been propped up. Uh, but, you know, if I'm buying a four cap and you know I'm having interest only loan on, you know, I projected toe have 3 to 6% rank with over the next couple of years and and now I would expect top one wants to go down. That's where I'm gonna head next to some of the underwriting. At least for a period of times. Top line runs go down. He capitalized at a four cap. It's a pretty strong erosion of value on 20% increases for insurance. That's, ah, year. You're going forward particularly. And then if you have any additional delinquency in turnover, so that means additional cat cutbacks in the turning of those units, casual is gonna be tight. Do you think that you know sellers are well positioned? I think you said that you do feel that in general that they were. But I tend to think that if someone was struggling before, things aren't going to get any easier for them and then overcoming, that's gonna be quite substantial over there.
Darron Kattan: 15:41
That's that's why I was focused on any deal that had transacted or refinancing last 12 24 months. If they had not transacted a revived in the last 12 24 months. To be honest, there going to be just fine. So, you know, if you focus on the deals that have transacted in 12 24 months, it was gonna be a tale of two cities. There's gonna be good operators that understand what's do, and I don't want state, uh, novice. But you know, panic operators who say, You know what? I need to get out. I'm in trouble so good operators will work their way through it. We've already seen on the operational side, management companies make a lot of decisions, you know? Obviously, cap ex projects are all put on hold. You know, they're working out rent deals with tenants, you know, whether it's multi family are commercial. To get themselves to a good spot. They're stopping distributions to equity partners to lower the pressure on themselves and accruing that on the back end. And they're gonna have to do that. So there's a lot of ways that good, experienced operator can manage their assets through this type of event if they just bought it or just refinanced it. And, you know, the leverage point is pretty high, because yet you're gonna see theatre BC and rents kind of plateau ing in this country. You know, the economy had been so good and so much rent growth in almost all product types in almost all areas that in the last 12 months or so we had seen that plateau. And so, you know, everybody buying a proforma, you know, four captain Hopes turned into a six cap was already probably gonna be in trouble. So, you know, time, hotel, cause now, very like you said, the likelihood is that there'll be negative rent growth in a lot of areas. A lot of product types, how hard and how deep echoes is. It remains to be seen. Part of it depends on when the lock bound and ease and when restaurants and, you know, stuff to get back to to some semblance of a normal operations in terms of the number of jobs in ways that they The good news about this crash remember seeing this on our big webinar is that the from the complexion of the jobs that were lost year were entry level jobs versus the finish financial crash, where there was a lot of white collar high salary jobs that were lost. Uh, these jobs that were lost can be recovered relatively quickly. Um, restaurant can open back up, and I are under people you know pretty quickly. So there's gonna be a lot of ramp up. Obviously, it's gonna take time. I think a lot of new restaurants will take advantage of open during this time on. Hire a lot of people from other restaurants, so there'll be a lot of shifting of jobs, but I think those jobs can come back relatively with me.
Andrew Wright: 18:21
Yeah, I'm not so sure about that. I mean, I definitely hear what you're saying in terms of it can turn on, and then all of a sudden people go from zero revenue to maybe 70% there. I need a lot more employees than they had, but Where is the new Normal? I mean, a social distancing going to restrict the number of C counts. Do people come back? How do you measure the number of supplies and eggs you need, right? I'm the cooks do you need in the kitchen? So I think it's well, while I hear there's it's easy, Teoh kind of go back on and try to put the band back together, if you will. I think people are gonna be very tepid once things open. To really understand what the new normal is in terms of demand reset and governmental restrictions will be definitely interesting. Toe watch How fast that recovery does take. Hold a Zeiss A every time on these public speeches. In private conversations, people want to be together. I do not believe that people were just retreat to their homes forever, even if it's not in their health well being. We were gonna take those chances and get back to normal at some point in time. Whether that's in three months or three years, time will tell eso spending our last couple questions just maybe focusing in on to the extent that there is fires out there thinking that there's gonna be some great opportunities. How can they best positioned themselves to the extent that that that does occur to toe one, identify them and to be prepared to move quickly? A lot of people out there looking for that type of thing. So how do our clients get a leg up?
Darron Kattan: 19:51
Sure. I mean, you know, it's kind of, Ah, return to the basics, if you will. A star is finding the opportunities. You know, most of those opportunities lined up presenting themselves for the brokerage security. So, to be honest, stay in touch with you know, all the brokers you're focused on, you know, a certain product in a certain area. You have to know who the active brokers are in that bottom man area, and you have to stay on their radar screen. You have to be in Texas them because quite honestly, opportunity present itself at any given time. And if you're not top of mind with the brokerage community, you know you're not getting that first phone call. So that's that's the first day you know, is you also as a buyer have to really understand stock markets to know which ones can recover which ones? Air insulated. Which ones didn't get hit as far Because their health industry oriented for you know, for example, for assistance, you know, tourism oriented. Which obviously is a big problem in Florida right now. So no language. Some markets are strongest. Well, no. We'll give you an opportunity to understand which assets you should go aggressively after because they can recover first. Quick it. You know, the old adage of real estate is, you know, location, location, location. And I've never believed in that to me. It's all the location, timing and leverage eso the location is very important on. And there's gonna be a regression Teoh focusing on that Obviously timing. You know, Black Swan events happened, um, was can't kind things, but timing is probably gonna present itself is a good thing in the next couple. After about 6 to 9 months of us settling down to finding some sort of bottom, hopefully timing would be really good to buy anything if you can. And then obviously leverage point. You know, those that were lower leverage in the last 2 to 3 years will be in good shape. Those that were higher leverage beat stuff I've always said if you get location, timing, leverage if you get all three right, you hit a home run. If you get two, right, you're doing okay. If you get one right, you're probably in trouble. And if you get it all wrong here
Andrew Wright: 21:56
Well, great. I think that was That was fantastic. I mean, 12 points that I would take away that you said his network network network be talking to people. There's a lot of everything's changed. Eso understanding that change. We're talking about deal, flow or geography, Zor. It's gonna rent growth, etcetera. On the other part is really tried to understand that boots on the ground knowledge of the sub markets eyes also gonna be invaluable toe to get into the front of line with that, any closing thoughts is we we wrap up 20 minutes. Want to keep the short ineffective just in terms of what? You're gonna be a kind of last last two minutes here to talk to the audience.
Darron Kattan: 22:33
Uh, you know, I still am a firm believer that the American economy will do really well. A firm believer obviously being based in Florida, Sun Belt will recover quicker than other places. I think that there's a lot of demographic shifts that had started that will continue and actually maybe amplify, such as baby boomers moving down from the north to the Sun Belt. I think that will amplify because they will just be sick and tired of dealing with, you know, the North snow all that as they've gotten to an age where a lot of them come down. So I think that will be somewhat of a safety grace for the Sun Belt in terms of our recovery and our ability to recover on as those people moved down here become year round citizens, the snowbird effect goes away. The tourism effective Florida are the tourism market. Share actually gets lower because you have more year round residents that are going out to restaurants and eating and using our you know, our entertainment venues. And, you know, assuming we get back into that, But you know, so we're gonna see a lot of population growth in population growth. Seems everything from, you know, economies in real estate. So I am optimistic that some Bell will do quite well relative to the rest of the country coming out the other end of this event.
Andrew Wright: 23:51
Well, great. Very insightful. Well, I appreciate everybody joining us for our first addition here of ST Talk a law from my house. So again, these these things, they're interesting time. But we're gonna do a series of these hopefully to continue to push out some good real time information to help our clients and big advisers again. Daryn Catan, managing director with our multi family investment sales team here in Central Florida. Reach out to him. Reach out to us. Reason to find on our website www dot franklin s t dot com www dot franklin s t dot com. We have our covert information exchange there. Another resource is we have built in our continuing to build to help navigate through this. So again, Thanks for joining us, Darren. Stay safe and we will see again for our next edition. Take care
Darron Kattan: 24:41